I have often said that tax reform is like the weather – everyone talks about it, but no one does anything about it. With Donald Trump about to become president, and his Republican allies in control of Congress, it would seem to many that tax reform is all but a done deal.
But tax reform is in the eye of the beholder. Just as the term itself means different things to different people, the elements of any given effort at tax reform resemble a tub of Play-Doh, before the stuff becomes an actual thing. What ultimately emerges from the pliable, sweet-smelling goo depends on the vision and skill of the crafters. And one observer’s “tremendous” could be another’s “disaster” (to borrow two of the president-elect’s favorite words).
It isn’t as though Congress has given no thought to the subject. The Camp plan – developed through thoughtful input and discussion – has sat on the shelf for years. In the interim, the House has devised its own tax reform blueprint. But that blueprint is so lacking in detail that any building constructed from similarly detailed blueprints would collapse long before it was complete. At the same time, the chair of the Senate Finance Committee has floated his own loosely constructed concept for tax reform, which relies on corporate integration.
In place of actual tax reform plans that could conceivably be enacted into law, we have heard platitudes like “business friendly” repeated ad nauseam. Politicians have promised to broaden the base and lower the rates. But to get the rates anywhere close to what members keep touting, Congress would have to eliminate nearly every tax expenditure in the code, including many business-friendly ones.
The latest mantra is the easy to say, yet hard to grasp, concept of a destination-based cash flow tax. And while the details have yet to be fully fleshed out, this new concept has an appeal, especially for advocates of simplification. Income would be taxed in the country where the consumer is located, regardless of the location of the business entity that develops the product, owns the intellectual property rights, or maintains a store. That feature alone could eliminate many of the costly inefficiencies in the international tax system, saving big bucks.
The problem with these approaches to tax reform is that because they change the current system, each one creates winners and losers. And each winner and loser will do whatever it takes to lobby Congress to support or oppose the particular aspects of any reform plan that affect them. Lobbyists for the fossil fuels industry will fight to the death any effort to reduce or eliminate the current tax expenditures for their industry – even if it might result in a marginally lower rate. Citizens in states with high local taxes will fight to avoid having to pay federal income taxes on their state and local taxes – even if doing so would enable them to file their returns on a postcard, as some politicians have promised. Sellers of imported products will object to the border adjustments inherent in a destination-based cash flow tax. And so on.
Author Thomas Friedman has described Congress as “the sum of all lobbies.” Because none of proponents have released a detailed, comprehensive tax reform proposal, those lobbies have largely kept their powder dry. But once such a proposal surfaces, expect them to bring out the big guns and start firing. Tax reform may not survive that onslaught, particularly if the prevailing attitude is better the devil you know than the devil you don’t.